Transcription
Bitcoin's one of, if not the last functioning smoke alarm of liquidity, and it's telling us not good things.
AI is sucking all the oxygen out of the room, all the liquidity out of the room. And I think that's happening to Bitcoin as well. We're in a new great power competition. Left to its own devices, I would think this would burst under its own weight at some point, but it's not going to be left to its own devices because AI has been identified as a key battlefield of the great power competition. And so my base case is the way this ends is with stocks up big in dollars and stocks down in gold and stocks down in Bitcoin. There are elements in the US that don't want to see that because those things will be communicating to the world, hey, you're just inflating.
Hey everyone, here with me the one and only Luke Groman. I have to share we were actually supposed to do this recording in person for the very first time and unfortunately I ended up very sick. So this is my first day back at work. Luke, you were gracious enough to reschedule do a virtual recording. So thanks so much for being here.
Well, thanks for having me on. I'm I'm glad you're finally feeling better. I felt terrible that uh that you got ill.
I know we got to reschedule the inperson one. I'm really looking forward to it when it eventually happens. But lots to talk about that you've been writing about. And let's actually start off with the Bitcoin question that everyone wants to know. Have you started buying back in or are you waiting for Bitcoin to crash lower because it's not doing uh well in these last couple days?
No, it's had a cough tough couple of days. You know, I I I nibbled a little bit. Um uh but basically the the answer is no. Uh I have not really bought back in in any real way. Um I I I again I didn't sell it all but I sold most of it. Um so the answer is no I haven't. Um and so I'm I'm watching uh with interest here. Um you know the way it's been trading particularly the last you know 3 4 days it's had a bit of a rough stretch and you know I think there's potential information in that. You know let's see.
Can you break down why you think this is happening when we're seeing um such momentum in stocks? We keep seeing the all-time highs. This is almost reminding me on the stock side of 2021, right? Every other day, all-time high, all-time high. But Bitcoin was doing so well back then, we were in a bull run. So, what's the disconnect here?
I I don't know for sure. My working hypothesis is is if you look at sort of the uh underpinnings of this market run, they're not really healthy actually. Um the headline indices, yes, all-time high, all-time high, all-time high, and it's like seven stocks. Um just saw a chart yesterday that X things related to AI, the S&P 500 is flat to down slightly uh from the day before the Iran war started. Um I saw another chart that showed if you look at if you take um US MSCI US and then MSCI emerging market um and you take TSMC um Samsung and another big AI/memory related name I can't think of it uh out of the US uh or the U MCI EM It looks on the surface like EM is crushing the US, but if you take those three or four AI related names out, AI's or EM is actually getting crushed. So there's these, you know, we've seen the stuff about breadth. Uh, and I think that's, you know, bread brethren of the market's very very poor for where we are in terms of the headline indices. And I think what's ultimately happening is, uh, AI is sucking all the oxygen out of the room, all the liquidity out of the room, and it's all in one area. And I think that's happening to Bitcoin as well. Uh I think it's a a vict victim of that as well. And you know, as we've we've talked about many times, I think Bitcoin's one of, if not the last functioning smoke alarm of liquidity, and it's telling us not good things. Now, at the same time, we also have um you know, we also have oil sucking liquidity out of the room and and we are uh doing everything we can to try to keep oil down. Uh well we uh the the the Trump administration, the US doing everything they can to try to keep oil down. Um mostly via jaw boning, western SPR releases, etc. But oil's up 50 what 50% from even even at these relatively lower levels. It's up 50% since the war started. So give or take. So, um, I think you got oil sucking oxygen out of the room, commodities sucking oxygen out of the room, AI sucking oxygen out of the room in terms of liquidity, and everything else that isn't one of those three things are directly related to it. Um, they're they are they're not doing that well. You know, they're they're flat to down.
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When it comes to the AI companies, it's really interesting to see that um some folks say this is a bubble and others say no. I mean, the the price to earnings are are really not that high. It's nothing like, you know, the dot era and they feel confident that it'll go much further. But I think you've even written about some of the accounting, right? It's like they're pulling all the demand forward, all the all the investments being made right now, but it won't really pay off in terms of revenue for many years, right? I mean, it's going to take many years for these data centers to come online and to generate real growth. Um, but all the investment is happening right now.
I would say it's it's less um that the real growth isn't happening. It's more um it's more the accounting treatment and so the accounting treatment because you are um you are uh booking it and building it up front. You're booking the revenues up front and then you're amortizing the uh expenses over some longer period of time. What the accounting treatment does to that in terms of reported earnings is in the front the faster you build and the more cash flow negative you are the higher and faster your reported earnings will go and but you're going to be very cash poor within that because you are sending cash out even though earnings are high you've got this this this um right so that's the accounting treatment of it and and you would expect to see earnings estimates going up, stocks responding to that. You'd expect to see them going from um funding out of cash to then needing to borrow money to needing to borrow more money. And so we're seeing that that's that that is that is happening. Where things will get tricky is when that buildout slows for whatever reason be that hey we can't get we we can't get the materials um in terms of actually physical commodities or if chips are held up or if permitting for the data centers in various localities gets out. Whatever the reason, if it slows, the second it slows, essentially your revenue growth starts to slow and the lagged effect of the uh amortization of of these uh of this buildout starts to catch up and then it flips. The earnings will slow very meaningfully or even start to decline, but they'll be largely non-cash. you will see cash flows actually rise meaningfully and uh so that will be you know how will the market treat that um will the market treat hey earnings are slowing but cash is really good now look on one hand um these stocks are trading relatively cheaply in terms of valuation like you said um that is that would suggest you know it doesn't have to be a disaster per se. The other hand is there's a lot of momentum and they're sucking all the oxygen out of the room and so if the earnings slow why do I own this versus you know anything else that has had the oxygen sucked out of and so does capital start to leave the space and go somewhere else. My guess is that's the latter probably happens, you know, and they probably underperform for some period of time at that moment. But it's it's that tricky part of hey when you know when when does that when does that slowdown happen and what causes it? And there's a lot of different factors that could do that. And I think the other thing that is tricky now that wasn't the case in 99 is in 99 we still had free markets. We had I mean it was less afair. it was sort of I would say 99200 we were talking about you know it's sort of peak America in that regard um which is to say the government was not very involved in uh the markets now they are and we were a unipolar power uh now we aren't we're in a new great power competition and so when the dotcom bubble burst it burst under its own weight of silliness uh with the you the sock puppet and and all this stuff and left to its own devices. I would think this would burst under its own weight at some point too or this would reverse under its own weight but it's not going to be left to its own devices because AI has been identified as a key driver uh a key battlefield of the great power competition and so that is that is the tricky part you know it's one of the tricky parts is is the government is likely going to support this they are likely going to do what they have to do to keep this build out going uh now that we'll continue to suck the oxygen out of the room sort of everything else which creates its own issues. We you know that's neither here nor there but that's there are a lot of things that remind me of the 992000 and these are some of the there's also things that are I think that I I think are are somewhat different.
It's really interesting to hear because there are so many people saying that we're going to crash sometime soon in equities and we're nearing a top, but kind of sounds like this could play out for quite a bit longer. Um, we always seem to be able to kind of kick the can down the road and then the rug gets pulled out when you least expect it. So, um, I know you recommend caution though around equities, right? And you've been really focused on gold and infrastructure. Um, can you talk a little bit more about something you mentioned on a recent podcast where you actually think that the prices of gold and Bitcoin could be suppressed in some way? Um, for the Bitcoiners, I think you said it could be like a 58 to 72K gang for a while. I mean, h how would they do that and why do you feel that way?
Yeah, some of that, to be clear, was a kind of a tongue-in-cheek comment because it was a a comment of of um what's the thing that would sort of frustrate the most number of people. Um, but I I I also think there's a when you look at some of what's happening here, um, there appears to be an effort by the US to run it hot, so to speak, and to move away from China. And so there are certain things politically that need to happen. Um, you need a weaker yen, weaker Korean wand to try to help you move stuff away from China. um that creates things that need to happen. Uh, you need a weaker dollar to reshore. Uh, and all of these things ultimately should be really good for gold and for Bitcoin. uh and um there are elements in the US uh that uh in that don't want to see that because that's those things will be um communicating to the world, hey, you're just inflating. Uh, and that creates some issues on the financing side with the Treasury market, particularly as it relates to, you know, the move in the 10-year yield we've seen since this war started. So I they you know I think the way they would do it is you know the expansion of derivatives the way they've done it with gold historically um I think you can in the long run I don't think you can do it uh with with Bitcoin but to the extent that you can expand derivatives um right I mean how we we there I believe there was somebody talking about a few months ago where there was a lot of uh people writing of were they writing calls I guess they were writing calls against stock, right? Um, and so basically if it gets sold, right, but that's you're satisfying demand. Somebody wants to own Bitcoin, but they're not buying Bitcoin. They're buying a call on Bitcoin. And somebody wants, you know, so if you didn't have those derivatives there, then, you know, if you want to own Bitcoin, you got to own Bitcoin. Now, you can buy a derivative on Bitcoin, and it starts to get sloppier, uh, looser. Um again in the long run those things don't matter. In the short run uh they can matter again depending on how policy makers want to manage optics. In the short run they can manage the optics to a lot of things. In the long run they can't.
Is it one of those things where the equity side has to break and then gold has to make its run then or could we see a scenario where everything suddenly is going up together and Bitcoin comes back into the fold or is it going to be like you know correlated or one's going to break and the other one's going to surge.
My base case is the way this ends is with stocks up big in dollars and stocks down in gold and stocks down in Bitcoin. Um, and you know, in that world, 10-year Treasury yields kind of hang out 4 to 4 1/2%, you know, 3 and 12 to 4 and a half% 3 3.75 to four, four and a half%, whatever. Um, that's that's that's I think the sort of ongoing base case end state of the world. We've sort of seen that's the world we've been in really since 2022. Um now you know Bitcoin had a terrible 2022. Um but if you particular if you go you know if you look from when the Fed started hiking rates stocks are down like 40% in gold terms even with the sell off in gold and the and the bounce in um and the bounce in in um equities on a headline basis. And the average it's probably not down 40% anymore. It's probably more like 20 30% now. But uh the average stock certainly is probably still down 40% in gold terms over the last 5 years. So that's sort of the intermediate and longer term outlook for what's happening here. That's what has to happen when you talk about reshoring, when you talk about um weakening the dollar, when you talk about rebalancing trade, all of those things cannot happen unless the dollar is much weaker uh against the Chinese yuan, which has been happening too uh in particular, but maybe even against things like the yen and the euro. But again, in a vacuum, you know, in a free market, that's how they would trade. We're not in a free market. And so, you know, the US needs the yen weaker if it wants to move stuff out of China. Okay? Uh if they want support from the So maybe maybe it isn't the the end. The US needs a higher yuan. They want a higher yuan. Uh and it's been happening. So my view is over the intermediate to long term. Yeah. that the way this resolves is much, you know, much higher gold, high much higher Bitcoin, higher equities in dollar terms, lower equities in gold and Bitcoin terms, and a stable a stable bond market. And of course, that's the case. Um, you know, bonds really get crushed u relative to gold and Bitcoin. And they already have, but again, they've already gotten crushed. You know, long-term bond futures in the United States are down 90% 90% against gold over the last 10 years. and that the GDP is still up in that time, which just tells you 90% wasn't enough.
Right? That's really crazy. Um, you do a lot of writing on the rare earths and all the leverage that China has, especially since it has really the monopoly over processing all of it. And you've talked a lot about everything, all the technologies that these rare earths go into, um, EVs and radar systems and our cell phones, uh, military applications, all of that. How big is that market and is that somewhere I mean because when I look at some of the rare earth stocks they're not doing so well like what how big is that market and how can people invest in it um if they agree with your thesis that this is going to be an area where we're going to need a lot of these materials and um we don't necessarily have the the production and mining ability to refine it.
Yeah. So how big is the market is a tricky question right? So from a monetary market cap basis not that big a market. Uh from a tonnage basis every year you look at what we import it's not that much. It's you know now how big is that market? Um it's a little bit of sort of the inverted exters pyramid right of you know the monetary inverted exters period sitting on um you know resting on gold. Um, you've got tens of trillions of market cap in US equities, particularly around tech, but around everything and around the world, um resting on this little sliver of of of in volume terms of rare earth. So, it's
It's fascinating with me.
It's Yeah, it's incredibly valuable. Um, it's not priced as such. And the the tricky part here too is the Chinese have dominated it. They've dominated in part because they two reasons. Number one, they worked at it for 30 years.
Uh plus uh they've got more engineers than anybody and they have fewer environmental regulations um at least early on. They they're probably modestly better in certain regions now. uh but fewer reg environmental regulations than than us for sure and and Europe for sure and they've come up with some very good ways of making these things very cheaply. Uh they control it's not often talked about. Everyone says well they've got the you know the reserves and they do the refining and no one ever talks about whether they've innovated in the machinery the actual refining machinery and the the refining processes and my understanding is they have. Um, now there's things we can do. Um, you know, you start putting this stuff on military bases, you don't have to deal with, you know, there's no nimi, not in my backyard issues in the US, for example, is something they could conceivably do. Um but you still have there's still a whole lot between here and there in terms of mine refine engineering base educational base and a lot of the machines you may use to do this may come from China and the Chinese may not want to sell it to you. And then I guess the final point in all this is the US government is now clearly involved. And so um is it going to be a business where historically when governments get involved in companies? They're not great companies to own um as stocks. Now that's that's been violated that that sort of rule of thumb has been violated a bit over the last 12 months. whether you look at Intel, when you look at uh some of these other stocks that the Trump administration has taken equity stakes in, they've done very well. So
MP Yeah.
Yeah. So there, you know, I can't get into specific tickers, um, just for compliance reasons, but, um, if you, you know, you Google rare earth US companies and you start sort of sniffing around those things, th those would be the types of companies that should stand to benefit from this as we build out this, you know, this infrastructure of our own. It really is interesting because that's something I was looking at and you're right in terms of market cap it's just kind of small but every technology does depend on it even if it's just a tiny bit right like a little bit silver in the battery or a little bit of gallium in this or a little bit of copper but it I mean it adds up right and so all these big companies are actually dependent on um what's essentially still considered a really small market um speed offers everything you need in one lightning app Bitcoin stable coins even digital gold allin one place. It makes Bitcoin simple. With Speed Wallet, you can send, receive, swap between assets, even spend on gift cards from brands you already use. Businesses can accept Bitcoin and stable coin payments, too. It's how Stake and Shake takes Bitcoin across every location. Download the wallet at speed.app/coinstories and use codeinstories 10 for bonus stats after your first transaction. You know what nobody warns you about when you get into Bitcoin? It's not the price swings. It's the quiet panic of realizing one lost phone or one misplaced seed phrase could cost you everything. That's why BitKey was designed by the team at Block. No seed phrase to lose, no single point of failure. And the new device has a screen so you actually see what you're approving before you send it. Recovery and inheritance are built right in. No subscription and no complicated setup. It's Bitcoin self-custody built for real life. Head to BitKey today and use my code stories for 10% off the new BitKey. Whether you have Bitcoin on an exchange or believe you have a good self-custody setup, your generational wealth could still be at risk. The best way to be confident is a 30inut consultation with the experts at the Bitcoin way. They take no shortcuts, only the best Bitcoin only hardware, nodes, and guidance. Visit the bitcoinway.com/natalie today and take control the Bitcoin way. Want Bitcoin in your retirement account? With Bitcoin IRA, you can deploy your SATs into a tax advantaged IRA. Go traditional to defer taxes or Roth for tax-free withdrawals down the road. Your future, your terms, your Bitcoin. Head to bitcoinirra.com/natalie and get up to a $1,000 funding bonus.
Let's talk a little bit about the Iran war. You were one of the only analysts who predicted that the Straight of Hormuz would be closed as long as it has been. And I don't think all of that has been priced. Um there seems to be this consensus that we still have the military power to do whatever we want around the world. Um but when it comes to the straight like it hasn't reopened right Iran the thing I don't understand is why um you know other countries also suffer when the straight of Hormuz is closed and I would imagine Iran has issues too. So, first of all, why are they able to close it for so long when it seems like there would be fallout globally since we're all a connected economy? And what is the Suez moment that you've talked about where the US is essentially on the brink of a very important strategic loss?
Yeah, I mean to be clear, um, I got the Hormuse thing dead right and I got the reaction the market reaction thus far dead wrong. um you know March 3rd, 6th, something I said there's going to be I would start preparing for it to be closed still on July 4th and people thought it was crazy and and and it's still going to be closed on July 4th. In fact, I guess major brokers came out and said it might still be closed on Labor Day um apparently uh last night uh now if you would have said, "Hey, where are markets going to trade?" If if if that's the case, if you knew for 100% sure on March 6th that it would still be closed June 3rd and probably July 4th and and maybe even Labor Day, it' be wow. Like that would be oil way higher than $95 or wherever we are today on on WTI and markets would be way lower. Um and yields higher and you know yields have moved not you know not that they're up 70 or 60 basis points 50 60 basis points since the war started so on the 10ear in the US Japanese Korean yields are up a bunch been a lot of treasury selling which we've seen uh essentially to manage uh current accounts that get out of whack because you got to import more expensive oil um but it's not a disaster yet. Uh my base case is that this is the like a guy jumping off a 100 story office building and he's passing the 40th floor going, "Hey, this feels just like flying. This is great." And it's not the, you know, it's it's not the fall that kills you. It's a sudden stop. And the sudden stop in this case is when you start hitting tank bottoms. We've had Exxon and Chevron and a number of other, you know, you you've had uh different Middle Eastern energy officials saying, "Look, this is getting to a very dangerous spot." Exxon and Chevron said in the next two, three weeks, um, you know, the Middle Eastern author authorities or or or officials have been saying, you know, something similar. Uh, it won't be evenly distributed. you're already starting to have some issues in Asia already uh in terms of supplies and the complacency is still astonishing to me. Um, you know, there's a meme that went around a couple days the other day where I showed like the bell curve and it was sort of, you know, you know, the the the idiot knuckle dragger on one end and the genius on the other end and sort of everyone in the middle and everyone in the middle were all the analysts and thank you know they could have put my head my face up there with all the other faces because I was saying something similar. Um, but you're just looking at the math going this doesn't make sense. is a problem and at both ends it's like you know oh oil doesn't matter and over here it's like oh horn boost doesn't matter and like yes for now uh they I I you know when you have that level of complacency this level of of of inventory drop and I think that's maybe been the big thing sort of myself and everyone up there at the sort of top is how much inventory could be run down how fast they would run it down app. Why isn't it reopened? That to me is still the big surprise that like that is what sort of the tail guys are just because there's not that much good information coming out from guys on the ground. You know, in the same way that it took eight weeks to leak out that we basically got blasted out of all of our Middle East bases by the Iranians. Uh in the same way that, you know, our air defense didn't work very well. Um, in the same way that two weeks ago there was just the congressional report of ex actually how many aircraft we lost. It was more than they told us. Um, and you sort of what's AAM's razor? Aams razor is the Iranians have more fire control of the Gulf than people want to admit. And that's what's happening there. You know, yes, there's an insurance issue, but the insurance issue is it's a insurance companies aren't going to write insurance because they don't like their ships going kaboom. like that's that's the issue. So that then ties to the point of a Suez moment for the US and I I think you know again when I spec I my I was so afraid to even write it when I first wrote it in you know in in early March mid-March like this has a risk of this happening by late March early April saying this is this is now the base case outcome uh last week Robert Kagan u the head founder of the project for new American century Iran hawk Hawk, Israel Hawk, pro-Israel hawk, Iran hawk, um never saw a regime change war that he didn't love. um you know, wife husband of of uh assistant secretary of state uh Victoria Nuland under the I guess it was the Obama administration. um who also was involved in the uh uh Ukraine overthrow of of the government there. famously was on tape saying FUK the EU. Um he's written two Kagan has written two pieces in three weeks talking about how this is a massive strategic loss for the US. I think he's right. Like this is not a guy who this is not a guy who who is not tied in, doesn't understand war, doesn't understand strategy. And he's saying he's written it twice. Now why is he writing it? I think he's writing it because he's a he sees that the writing is on the wall. um the US is going to take a strategic loss in Iran in in in the Gulf one way or another and he's trying to frontr run that preempt it that it was that it's going to get pinned on the neocons and the Iran hawks uh and you know the the the foreign lobbyists of a certain country in Washington and he's trying to frontr run that he's I that's why I think he's writing this many things saying this is all Trump's fault This isn't neocons. We didn't want this this Iran. Like,
What are you talking about? This has been the neocon wet dream for 40 years. And now you got your fight. Now you caught the car that you've been chasing for 40 years and you don't know what to do with it. And so what does it mean for markets? When the Brits had their Suez moment in 56, the the median rate of inflation over the next 20 years was almost 7% per year for 20 years. uh in in the UK it's a it's a loss of status on some level it is a a recognition as it relates to the US you the US defense umbrella what why am I paying the Americans for the defense umbrella and I think it gives the US some real optionality to be clear you know look if we don't have to provide this umbrella we can invest more domestically you know these bases if they've all gotten damaged or whatever we can move on from them we can let someone else deal with it Um, now let someone else deal with it is going to probably mean China uh dealing with the Iranians. the Iranians retaining control of the Gulf of the Straight of Hormuz and multicurrency energy pricing away from the dollar accelerating and that's what that that's what that looks like and that's why I think it ends up being structurally inflationary and weak for the dollar is ultimately you know if you can buy energy and commodities in your own currency you don't need to hold as many dollars around the world in reserve and if you don't need to do that you do need to hold more gold and and uh that means somebody else has to buy those treasuries And we can't really afford above 4.8 4.6 4.8% on the 10ear. So when at some point that somebody is going to be the Fed with printed money or their proxies in the banking system, however that's achieved and that's going to be secularly inflationary just like the Fed's balance sheet going from, you know, 800 billion to 6 trillion or whatever it is over the last 20 years has been secularly inflationary on the way.
But doesn't keeping the straight closed hurt Iran? Isn't that like a self-inflicted wound? Or are they just getting around it because they're able to do things like the rail system you've mentioned via China or I mean like why would they want it closed
Just to stick it to us?
It's a pain contest. It's unquestionably a pain contest. It is not in their interest. Uh it's not in their interest to have it closed. Uh now with that said, you know, a you've got some background that the Russians are supplying them via the Caspian, C on some level, the Chinese through the rail system. Neither of those are s of sufficient size um to offset everything that is a it's basically a morphine hit in the pain contest. Um on the other side of the ledger, you've got the the the world that is short oil. uh and that oil short is being morphed uh by the release of SPR uh strategic reserves and inventories around the world and that's fine too. And so you're basically in this pain contest between the draw down of inventories and what you know sort of the the Iranians can can you know wave in through the back door of the Caspian Sea and the and the rail system to keep them from politically collapsing internally. e economically etc. Um the common thing is, hey, well once tank bottoms hit once tank bottoms start to be hit, we'll just ration demand via price. And I go, exactly. You know, the problem is that, you know, these these people that say, well, they'll just ration demand globally versus price. They don't want to say or they don't know and they should know. But ration demand via price means recession. That's what that means. and inflation, a stagflationary recession at a time when nobody in the west can afford for receipts to go down as they do in a recession and for rates to go up as they do in inflation. And so rationing demand, you know, if if we hit tank bottoms and we have to ration demand, we are going to be in a spot where the interest expense of the west is going in the wrong direction and the revenues, the federal revenues of the west are going in the wrong direction and they are blowing out like that and in the US at least at this time the UK I think as well you're already at 100% of revenues or close to it in terms of your entitlements plus interest. So, your revenues are going to drop, your your interest is going to go up, and then things are going to get really spicy. So, that's the pain contest between the two. Um, and look, if if I'm Iran, like, I've been bombed. I've made it this far. I've been preparing for this for 40 years. I've dug all these tunnels. They didn't get nearly as much of my stuff as they thought they did. Now I have a chance to negotiate a, you know, it's not going to be a tolling system. It's going to be an environmental fee. Look at that. Iran's green. Who knew? Um, then, you know, we'll see. You know, we'll we'll see.
Well, I've read reports that they've created some sort of system with payments in Bitcoin. Have you seen that? Is that verified?
I thought that for a moment I did. Yes. Um, I I've not seen much about it since. Uh, I saw, you know, I saw Bessant bragging about grabbing all their crypto over the weekend, but
Yeah. Yeah. In theory, they they couldn't do that with Bitcoin unless it was, you know, on an exchange somewhere. And if I can't believe they they, you know, maybe the Iranians are that dumb. It's entirely possible, but I'd be a little surprised. You go to all that length to get paid in Bitcoin, then just leave it on exchange somewhere. That's not very smart.
Um,
I have seen that. Uh, no. I would say that if they were doing that in any size, I don't think Bitcoin would be at 68,000 or wherever it's trading today, it would be probably 168,000. So, you know, uh, who knows? The one the other area we've seen it really is is the uh, the CIPS, the Chinese interbank payment system. The volumes there since March have exploded higher. U, uh, which suggests a lot of that volume is being done through CIPS in Chinese yuan. And that de facto means gold.
Well, before we start to wrap up, um I'm glad you mentioned gold again because you show these charts of how our essentially our G gold exports, non-monetary gold experts exports have increased. We talked about it on the last show. It's still so hard for me to understand why it's called nonmonetary gold if essentially it's being used to settle trade. So, doesn't that make it money? But can you talk a little bit about that and how we've seen essentially we're we're shipping off our our gold and presumably it's ending up in China via either Switzerland or London.
Yeah. So we brought in a bunch of gold in the first quarter of 25 right when Trump got elected for his second term. Bunch of it. And then not much happened. Gold went up in price a bit. And then starting uh around October of last year, we began moving right right around uh into and then after the uh the Busousan, South Korea meeting between uh the US and China, we saw five of the last six months non-monetary gold has been the single largest export of the United States. Uh bigger than aircraft, bigger than pharmaceutical preparations. the one month it wasn't the biggest, it was the second biggest behind pharmaceutical preparations. It's
Crazy.
Um, so yeah, we've been, you know, and there's one school of thought that says, "Hey, we're just moving the gold that we brought in back." Um, and it was brought in ahead of tariffs. On some level, some of that gold, I think, was brought in because of tariffs. I don't think it was all brought in because of tariffs. Um, because it's pretty easy. Gold is a political metal. You pick up the white, pick up the phone, you call the White House. if you're these people and you go, "Hey, are you going to tariff it or not?" And even if you don't believe the guy, you don't bring all that, you know, that much gold out of out of London, etc., Switzerland here. Why? Um, and at any rate, the tariff issue was resolved in July. And so, you know, the exports didn't really start till October in a big way. They they picked up a bit in the second quarter, dropped back off, and then they really started picking up big again in the fourth quarter and beyond. So de facto, yeah, that's net settling trade. You we can see where it went. It went from here mostly to Switzerland and uh some to China, but then the stuff from to Switzerland and the UK, their biggest export destination was China or Hong Kong. So
All this gold we brought in, regardless of of whether we want to debate the flow of when it came in in the first quarter, it's just reversing that flow. The fact is is that it went to China uh at a time we're running big deficits against China and it counts by reducing our trade deficit, right? There was any number of announcements from any number of Trump supporters saying, "Hey, look how much Trump is reducing the deficit." Yeah, he is the trade deficit and the biggest marginal change is gold exports. So, um that's and that's fine. Like that's actually that actually is what needs to happen. It needs to happen at a much higher gold price because otherwise we're going to run out of gold. Um but in theory, you know, look, Besson's a smart guy.
If if the world will sell him gold at 4,500 and he has struck some sort of deal with the Chinese that 4500 in gold will buy $6,000 of rare earths, that's a good deal. um ultimately the price will move higher over time in theory but you know things like that there there are ways to manage this um now why is it non-monetary gold non-monetary gold uh has to get reported per I think it's IMF uh reporting requirements for trade uh monetary gold does not if you buy if you're a central bank buying monetary gold uh or you buy non-monetary gold and then you reclassify it as monetary it never has to show up. So, it's entirely possible that that non-monetary gold has nothing to do with any sovereigns per se and it's just Chinese gold demand being satisfied, which again is still net settling the US's trade deficit or net reducing the the trade deficit with China via gold
Or and and and it's very possible that we've shipped a bunch of monetary gold to China that we don't know about. no one knows about. Um, it's not recorded.
I mean, it's it's hard to know what to trust anyway, right? I mean, you get data from like the People's Bank of China and it's like h how do you how do you trust that that's accurate? Why wouldn't a country an adversary say, "Yeah, we we have all of this because it's it it's an advantage to them to appear that way." But like, how do we know the truth? I don't know. I mean, I don't even trust half the stuff that comes out of our government agencies. They lie to us about inflation. where this is all go. I don't think anybody trusts anybody anymore in this world. And in that world, the world goes to what is um it's a dated term, so it's probably not politically correct, but you know, I'm from Cleveland, so I'm going to be a little uncouthed, but you my my grandfather used to say no ticky, no washi, right? Which is the old you don't have a claim check, you can't pick up your your your dry cleaning. Um, the world's going to a no ticky, no washi system. And what does that mean? Well, that means, hey, America, you want rare earth? Fine, here they are. Send the gold or the next shipment doesn't come. Hey, China, you want oil? Send the gold or the next shipment doesn't come. Hey, Russia. Hey, Europe. Hey, and you can see China's setting up a system for exactly this. They have been for years. There is a offshore yuan clearing bank in every major gold hub in the world. They've got one in London. They've got one in Switzerland. They've got one in Dubai. They've got one in Singapore. They've got one in Hong Kong. They've got one in Shanghai. What does that mean? Well, if you just happen to run a surplus against the Chinese, which almost nobody does except for oil exporters sometimes, and the Koreans every now and then, you end up with some yuan net. Nobody else ends up with yuan. You know, you're running deficits against the Chinese. They end up with your currency. you don't end up with their you don't end up with theirs. But if you do end up with yuan, what do you do with it? Well, the Chinese make a lot of good stuff. You buy very good BI BYD cars and Huawei equipment, blah blah blah. And if you still have some yuan left over, you don't want to buy any of their stuff, you buy gold. And then you take it out of that gold hub and you put it in your own vault. And again, no ticky, no washi, no proof necessary. It's old school proof of work, right? It's like it ain't efficient. It isn't instantaneous, but it's proof of work cuz they got to load those things on a truck and they got to hire the security and then they got to move it to the airport and the airport's got to PL, right? So, when you see there was news two weeks ago that uh China's biggest courier, right, FedEx of China is opening a 2,000 ton gold vault at the Hong Kong airport. Now, China's going to do paper gold, credit gold, like the West. Why would their biggest courier need a gold vault? That would imply at an airport, by the way, a big gold vault at an airport. Why would they need to set like they're setting up the sort of the no ticky no- washi system, the proofof work system around the world? Because nobody trusts anybody. Um, gold, Bitcoin, I think, could ultimately serve that role. Um, but I think there's some real questions in in in uh foreign governments around back doors to exchanges, things like that. Um, I'm not technical enough to be able to go chapter and verse to and it's just easier for I think the average, you know, if you're Putin like I'm sure he can get explained to him, hey, here's why Bitcoin is safe or blah blah blah blah blah. And, you know, they're mining some of Bitcoin. But at the end of the day, is 70-y old Putin, 70-year-old she, 70-year-old, you know, head of Pol, you know, head of Poland, are they going to trust Bitcoin? Are they going to go send me the gold and I'm going to put it right here next to all my tanks, all my missiles,
Right?
They're making the latter choice. So, I agree there's no trust and I don't think though people will trust what's in each other's vaults, but to the extent the world's going to, hey, fine, I don't
Trust you, period. I'm not going to, you know, I will take your paper in payment, but in settlement, I am going to exchange your paper for something that's going to hold value. It isn't going to be your IUS. I don't trust your IUs. Anybody give me gold or give me something I can use: commodities, etc. And that's where I think this is all going.
It's so interesting because as we enter the age of intelligence, it's so natural to assume that it would be a digital form of gold, but we're just not there yet. As a technology, Bitcoin is so much more superior, and you don't have to worry about all the physical elements that make gold, you know, so cumbersome and difficult to, um, transport and verify and all that. And it's like, but we're not there yet. You're right.
Um, okay. Well, to close it off, I feel like every interview I've seen with you, it has this like doomer edge to it. Like, would you consider, even the last time we talked, you were like, 'I'm kind of nervous about where things are going,' and I know that you've like paid off all your debt, all of that. So, I feel like people are cons putting you in the doomer bucket. Are you in that?
Um, there's this great phrase by William Arthur Ward, I think is the author. He says, 'The optimi, the pessimist complains about the, and the optimist expects it to change. The realist adjusts the sales.' I think I'm a realist.
Um, like, there is, we have 150 years of history. There have been 58 countries in 150 years of history that have had debt to GDP hit 130%. And as of three years ago, 57 of them defaulted on that debt, mostly via sign a period of significant inflation. I've been doing this 30 years. I can count on one hand the number of times I've had, you know, a 57 out of 58 chance historically of happening. And, oh, by the way, the one that it didn't happen as of 3, four years ago was Japan, which is now inflating and having their debt really fall apart. You know, the, the, you know, the value of the Japanese bond market is shrinking meaningfully. Inflation is picking up, rates are up, stock market's ripping, too. But their stock market actually, over the last 5 years, is down about 20% in gold terms. So, the one time, so I've got something that's 58 out of 58 times over 150 years. And the United States hit 130% in the summer of 2020.
Okay. So, like I said, since then, long-term US Treasury bonds have fallen, I think, 60% against gold, 50% against gold, uh, equesting the sales. Um, it's, you know, what's normal for the spiders, chaos for the fly. Look, you want to put put all your net worth in long-term bonds? Have at it. Good luck. Have fun. You're going to get paid every dollar you owe. It's not doom. It's just math. Um.
We're a culture now that doesn't really like reality, too. So, that's the other part. You know, re realists aren't real popular in America. You know, it's, it's, I'm not going to get into all the politics of that, but, but there are a lot of things where, you know, so that's part of it.
And the other area I think I really get hit a lot on the doomer side is is AI. And here, I think people are being way too credulous again. And by that, I mean, you have a lot of the same big tech people telling you on one hand that this is the most revolutionary technology in history. It's going to be bigger than the internet, and the valuations to match. Okay. And when I say valuations, it's valuations relative to the market cap of of America, of total equity market cap. They're in La La Land. And these same people are telling you, 'Don't worry. AI is not going to disrupt employment,'
Right?
Okay. One of those two things can be true. Now, over a long enough time horizon, both of those things can be true. But for the business case of AI to make any sense relative to the valuation as a percent of the economy that these things are trading at, they have to kill employment. They have to kill white collar employment. That's the only way the math works.
And so you kind look at this and go, 'Okay, well, they're not going to kill employment.' Well, if they're not going to kill employment, then they're not the biggest thing since the internet. They don't deserve those valuations. And that's going to create a problem in private credit, etc., to all the people who loan money to those things. And if they are the biggest thing and that valuation makes sense, then white collar employment is about to get eviscerated at a time when in white when employment in the United States is half of tax receipts, and we aren't even covering our tax receipts, or barely, the tax receipts are barely covering just entitlements and interest.
Yep.
So, which one is it? And I've asked, you know, look, I have a big following. A lot of times, people don't follow me. If I ask a question on X, I can get an answer. And every time I ask one of these guys that question, crickets.
Right?
Crickets. They, you know, David Saxs was on X the other day. 'This is not AI is not driving job losses.' Look, we, we had 95,000 jobs. 95,000 jobs. Like the Ben Stiller, is that those are job gains for ants. 95,000 jobs in a month in a country of 350 million people. When I grew up, a good month was 200-300,000 jobs in a month. And that was 20-30 years ago when the population was 30% smaller, 20 20% smaller. So, like, like, doomer, fine, call me a doomer. I'm just looking at this realistically and going, 'Look, long-term, sure, we can have a booming AI and we have booming employment.' But between here and there, in our debt position, these things mathematically can't work out. That's just a fact. And they know it. They absolutely, they are far too smart to say what they're saying. They are. And why are they saying it? Imagine if they came out and said what I said. What do you think the politicians are going to do? We already start to know. Do you see what Bernie Sanders said the other day? 'I think that all Americans should have a share of the AI companies as it takes their jobs.' That's. And so you get Andre, and you get Sachs, and you get, 'There's not going to be any job losses. These are not the job losses you're looking for. AI will not take your jobs. It's all gonna be awesome.' So, you know, am I a doomer? I don't think it's doom. I just think it's realism.
Yeah. No, I, I for one, appreciate your realism because I think you're one of the only analysts that call it like it is, truly.
At least like I see it. Look, I, I'm, I'm going to be right about something, be wrong about some things. But I can say, I have, you're going to get exactly what I think and why I think it, and, and there's no, uh, ulterior motive to it.
Well, well, I think you're absolutely right. I think the question is always just getting the time timing right. That's the hardest part. Like, the time horizon's so so challenging because what we said earlier, it's like we can kick the can down the road. But some of these tech CEOs, even Elon Musk, has talked about how we're going to end up in a situation of like UBI necessary, and that has a lot of political consequences.
Um, but don't worry, I've been called a doomer too because I don't think the Bitcoin bottom is in. And I've been mentioning that, uh, because I follow like one of the analysts that you have, and you're writing Northstar bad charts. Um, they're predicting like Q3, Q4 bottom somewhere in the 40ks. Like, I really think that we could see that.
I might get my number. I might get my number.
Be bottomed at 60. And I'm like, I'm, I'm a little more cautious about this whole...
Yeah, they're pretty good on the technicals of everything. I like those guys a lot. And, uh, um, yeah, I might, you know. Well, you will be an epic hero if you end up buying back in at like 40-50k when you sold the top for a second.
Well, I didn't, I didn't sell the top, but I sold closer to the top than what might be the bottom, but, you know, something like that.
I know you get a lot of stuff online from the Bitcoiners, but I think it's pretty legendary.
Um, well, thank you so much, Luke. It's always great to talk to you. We'll sit down in person. At some point, we're going to have our, our, uh, big master class that I was hoping to, to record with you. But thanks for your time. Um, where do you want to send people?
Uh, yeah, if, uh, more information about our, uh, institutional mass market products, can check us out fft-lc.com. And I am on X, or the tweeter, at, uh, uh, Luke Groman. Lu K- R-N.
Get those notifications on because you have great tweets. All right. Thanks so much, L.
Thanks, Arma.
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